How Tea Party Favorite Rick Scott Helped Cook Up a Sweetheart Deal for His Florida Friends

I’m not going to say anything about this deal cooking among Tea Party politicos in Florida other than, hmm . . . this seems smarmy.

The blend of politics and commerce has always been an ugly one, and it boggles my mind that some who rage about the poor using food stamps for potato chips stand by in silence when the government hands out the financial equivalent of snack companies to corporations.

The Florida example is a transaction that I find to be the most discomforting I’ve come across in a long career writing about business. (Full disclosure: Much of this involves Governor Rick Scott. Years ago when I worked at The New York Times, I investigated Columbia/HCA, where he worked as C.E.O. The reporting turned up an array of illegal activities and financial shenanigans. Scott was tossed out as C.E.O. by the board and the company went on to pay a $1.7 billion fine for cheating Medicare through the filing of false records. Scott was not charged with wrongdoing.)

The transaction involves the Citizens Property Insurance Corp., a not-for-profit, tax-exempt government corporation that provides property insurance through the state to Florida property owners. According to Citizens’ self-description, its job is to insure “hundreds of thousands of homes, businesses and condominiums whose owners otherwise might not be able to find coverage.”

What that means, of course, is that Citizens has to provide insurance at a rate lower than these buyers could obtain in the private market. That’s the nature of insurance—high rates represent high risk; the state can’t change the risk, so it is setting up a rate system that is lower than a private company could offer. In a way, it’s like group insurance for employees: the state is spreading out the risk caused by middle-class and below folks living in a hurricane zone among the taxpayers.

Now, that setup may enrage a Tea Party type who doesn’t understand the self-interest in community interest. I hate that I have to address this through the “here’s why it’s good for you” approach, rather than just saying working people shouldn’t be forced to be homeless simply because they live in Florida, but here goes:

If hundreds of thousands of people could not afford property insurance, that means that hundreds of thousands of pieces of property could possibly be destroyed in a hurricane and then never rebuilt. Florida could become a wasteland of wrecked homes and businesses. Hundreds of thousands of people could be homeless—meaning either taxes go up to help them, they simply wander the state, or they leave. And since these people own property, they are most likely taxpayers, meaning that, if they depart, the Florida tax base will decline. (On the other hand, if they left, that would decrease the number of non-rich voters, a great way to accomplish what Florida’s voting restrictions failed to do, by bumping up the percentage of probable-G.O.P. voters. Just sayin’.)

Now the availability of private-property insurance has been shrinking these days because the companies have been adjusting policy standards amid the effects of climate change (somehow, companies with a financial interest in the impacts of climate change seem to believe in it, even when the party of business doesn’t). The result http://www.corelogic.com/landing-pages/property-and-casualty-insurance.aspx in coastal states has been moratoriums on new policies, rules forbidding the issuance of policies for properties near the shoreline, or, at the worst, simply pulling out of those states. In other words, private insurance is becoming less reliable for places like Florida, increasing the potential need for an entity like Citizens.

Then . . . Tea Party favorite Governor Scott got into the mix and made the 1.2 million state-sponsored insurance policies the focus of a privatization campaign—a mission involving statements that were about as accurate as his old company’s Medicare filings. Indeed, either Scott was intentionally deceiving voters or he doesn’t understand how insurance works.

In repeated speeches, Scott proclaimed that Citizens was in danger of financial disaster because it had less than $10 billion of cash on hand but more than $500 billion in risk exposure. That’s true, as far as it goes, but the implication is completely false. If insurance companies needed to have cash surpluses close to the value of their total risk, every major insurer in the nation would go under.

The “less than $10 billion” cash surplus—now $6.4 billion, actually—has been raised over the course of six years when there have been no financially devastating hurricanes in the state. But insurance companies don’t come close to depending on such reserves to pay claims, and certainly Citizens is no different, as its financials show.

Just like every other licensed private-sector insurer in Florida, Citizens has backup insurance from the Florida Hurricane Catastrophe Fund. It also has reinsurance—where it essentially lays off the risk of policies it issues to other insurers—and what is known as pre-event liquidity. All told, the claims-paying ability of Citizens is $19.5 billion, significantly more than Scott’s “cash surplus” talking point implies.

As for the $500 billion claim, that is once again technically true and totally ridiculous. Politifact analyzed Scott’s statements—determining they were “mostly false”—and had this to say about his warnings about Citizens’ policy risk.

What would it take for Florida to actually have to pay out $500 billion in claims? A superstorm 25 times as ferocious as Hurricane Andrew would have to hit South Florida, and zigzag its way through Florida’s peninsula, hitting all 67 counties and damaging or destroying every home and business with a Citizens policy. A series of back-to-back, Andrew-sized storms up and down the state could also do the trick.

I’ve got bad news for Scott: if that kind of storm hit Florida, probably every insurer in the state would go under. Once you start playing out fantastical scenarios—aliens may come down from outer space and destroy all Florida homes! It’s possible!—you are creating government policies based on nonsense. Indeed, what would it take to exceed the amount of claims-paying ability Citizens has? Well, Citizens has the ability to bring in other cash through a variety of means, not just including taxes on Floridians. But let’s limit the scenario solelyto the claims-paying ability it has now: what kind of storm would it take to exceed the $19.5 billion available? Back to Politifact:

[A] more realistic estimate of maximum losses would be the 1-in-100-year storm, the so-called “Big One,” that would cause more damage than Hurricane Andrew in 1992. Estimates indicate that kind of storm—which only has a 1-percent chance of occurring in a given year—would cost Citizens a maximum of $21 billion.

So, Scott is calling for a major realignment of the state policy on insurance to address a far-fetched scenario. And what is the solution? Why, enrich the private insurance companies with state money! And guess who has been receiving large campaign contributions from one of the biggest winners of Scott’s largesse? Come on . . . do I really have to tell you it’s Scott?

The company in the latest deal is called Heritage Property and Casualty Insurance, and it has had quite an amazing history in Florida. It was licensed to do business in the state last August 17, months after Scott launched his privatization campaign. Less than eight weeks after being allowed to start business, on October 10, Heritage decided to donate $30,000 to the Florida state G.O.P. And again, less than two months later, Citizens began to transfer policies to Heritage as part of the privatization plan, all while the private company was spending huge sums on lobbying.

Hold on, it gets worse. In March, Heritage contributed a hefty $110,000 to Scott’s “Let’s Get to Work” re-election campaign. And once again, two months later, the benefits started raining down on the insurance company: the board of governors of Citizens voted to pay $52 million in exchange for its taking over 60,000 policies.

Through a spokesman, Scott has said he played no role in the decision. But Citizens’ board says it was responding to Scott’s mandate that it downsize the company; the motion to do the deal with Heritage was put forward by John Wortman, a Scott appointee and one of three board members to approve. Two others opposed, criticizing the deal on many levels, including the fact that it was rushed through in less than a week.

A number of Republican legislators are not pleased. “Citizens’ board continues to fall prey to Tallahassee lobbyists who cook up these get rich funding schemes,” said Representative Frank Artiles, a Miami Republican. Added Republican legislator Mike Fasano of New Port Richey: “Sadly, Tallahassee is for sale.”

Let me repeat: Those are *Republicans.*The folks from Scott’s own party.

So what is the upstart, politically wired company that is winning all this financial benefit? Its president is a man named Richard Widdicombe, who has not received nice press in Florida. According to a report in The Miami Herald:

Richard Widdicombe has a track record of fines and violations from insurance regulators. Two of the companies run by Widdicombe racked up hundreds of violations and thousands of dollars in fines for breaking insurance rules. The violations from Office of Insurance Regulation include “failure to pay claim timely,” using “unlicensed insurance adjusters” and making “misleading” advertisements. One company run by Widdicombe, was suspended and fined $150,000 for using unlicensed officials to sell insurance policies over the phone and sending repairmen to fix damages rather than paying for claims.

Whether the Citizens’ board thinks Heritage and Widdicombe are the best choice for this deal, the terms of the transaction are just ludicrous. The $52 million payment will be structured as part of a backdated reinsurance deal, where Heritage will have to assume claims on certain policies that occurred beginning on January 1 of this year and continuing through June 28. For a second, that sounds O.K.—the money from Citizens to Heritage, it seems, will be going out to pay for existing losses on policies.

And then the second ends. Because the deal allows for Heritage to cherry-pick which 60,000 policies it chooses, it has the power to select those that have put in no claims. That means its total risk exposure can be nothing from January 1 to now—in fact, the only risk will be what happens in the four weeks before June 28. To get a better understanding, this would be like my giving you $1,000 to assume certain bets on the last five spins of the roulette wheel, and I allowed you to choose which ones you’d take; of course, I’d make you assume the bet on one remaining spin, but that hardly makes our agreement worth the money I paid you.

But I doubt you would ever get a deal like that. Based on what the Republican legislators in Florida are saying, first you’d need to hire some lobbyists. Then we’ll talk.

The bottom line of all these financial maneuverings is this: if people want to scream and yell about government spending, they should recognize that politicians have become expert at pointing the angry toward the poor, while the wealthy corporations winning lucrative deals in the statehouse wander toward the bank fat and happy. Welcome to America, land of the free and home of the naïve.